Can a successful exit by a Canadian tech firm jumpstart innovation in Canada?

In 2002, PayPal, the online payments giant, was sold to eBay for a cool US$1.5-billion. Overnight, many of PayPal’s core employees got very rich. Rather than calling it a day, however, the so-called PayPal mafia went on to found and invest in a wave of new startups. You may have heard of some: Facebook, LinkedIn, YouTube, Yelp, Zynga and Kiva … to name just a few.

This summer, Facebook is cutting the ribbon on a brand new office in downtown Vancouver. The social media giant will employ some 150 staff, mainly recent software engineering grads from the area. According to the company, Vancouver was an ideal choice: close to Facebook offices in Seattle and Silicon Valley and attractive enough to pull in talented new recruits.

From one buyout, an entire ecosystem of wildly successful tech companies was spawned in Silicon Valley. In the past decade, the PayPal Mafia’s track record has been nothing short of extraordinary, with one promising startup after another propelled to billion-dollar status and well beyond.

So what’s their secret? The likeliest explanation is that the PayPal buyout gave some very young, very ambitious people the confidence to try for another big win and an experienced network to fund them.

If that’s all there is to it, then I’ve got a question. Why does Silicon Valley get to have a monopoly on innovation? Why aren’t new tech mafias springing up elsewhere? The Internet radically decentralized information and ideas. So why is startup success still confined mainly to one corner of California?

The question isn’t just academic. I’m CEO of a growing social media company based not in the Bay Area, but some 1,600 kilometres north in Vancouver. The city has a solid cluster of new and legacy tech companies, from Electronic Arts to mobile game developers; tech incubators; and world-class universities.

So what’s standing in the way of a brand new tech mob taking hold here and turning Vancouver into the next global tech hub? Well, to be honest, there are a few hurdles:

The temptation to sell out Right now, cities the world over are home to startups with billion-dollar potential. But it’s the nature of the tech industry today that promising companies are spotted fast and bought cheap by the Googles and Twitters and Microsofts. Having been a struggling entrepreneur for most of my life, I understand the allure of selling out. You’ve got a good idea but limited revenue and often significant debt and suddenly someone shows up with a few million dollars.

Maybe it’s time we took Sean Parker’s lines from the movie The Social Network to heart. A million dollars isn’t cool anymore; a billion is. It’s critical that tech entrepreneurs grow their companies, develop steady revenue streams and only then think about an exit.

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Consider that a young, Vancouver-based Flickr — one of the Internet’s first real photo-sharing sites — sold to Yahoo for a paltry US$35-million in 2005. That may not sound paltry to many struggling startups, but a similarly promising photo-sharing site, Instagram, sold to Facebook for US$1-billion last year. And it’s only when we start talking about 10-digit exits that the prospect of creating a true PayPal-style mafia becomes reality.

Which is why I plan to hold out. Four years ago, I developed a tool that lets you access different social media accounts — Twitter, Facebook, LinkedIn, etc. — from one interface. Today, HootSuite has more than 300 employees and six million users, and it’s used by three-quarters of Fortune 100 companies. There have been tempting offers, not to mention requests to move to San Francisco, and we’ve turned them all down.

We’re committed to growing an amazing, billion-dollar-plus company in Vancouver. The dollar value isn’t as important as the company’s legacy and the culture of homegrown innovation it inspires. When (and if) a liquidation event happens, the HootSuite team will be left with financial resources, network and a lot of expertise — key ingredients for a homegrown tech mafia.

The education crisis The PayPal mafia, however, thrived as much because it had ready access to tech talent as because it was well funded. This is where lots of cities, Vancouver included, come up short. The city is contending with a major shortage of developers, engineers and programmers. Universities are simply not turning out enough grads with the requisite tech skills. (If this seems absurd in a climate of global recession and mass unemployment, it should.)

And the magnetic allure of Silicon Valley means people with qualifications are migrating en masse to the Bay Area. An estimated 350,000 Canadians live and work in the Valley — an entire lost generation. It’s no exaggeration to say that much of the world is in the midst of a global brain drain of engineering talent.

For a homegrown tech mafia to flourish, universities in Canada need to counter this loss of talent by exponentially increasing the number of tech grads — and fast. Consider this an open challenge to the ivory tower. In a few years’ time, Vancouver will be flush with tech capital, and some smart people will be gunning to build the next Facebooks and Instagrams. Will entrepreneurs have to import talent from elsewhere or worse be forced to pack up for San Francisco because they can’t fill jobs? The answer depends on how effectively the educational system is able to funnel students into engineering programs now and send the message that the jobs of tomorrow are in tech.

But enough of the doom and gloom. A homegrown tech mafia here or anywhere else in the world would have a few key advantages over the vaunted PayPal Mafia. It’s not exactly a secret that Silicon Valley is the place to be if you want to ride tech’s next gravy train. As a result, promising startups are swamped with offers from venture capitalists and angel investors, which drives up the price of investing dramatically. Bargains aren’t likely to be found, and busts are as common as booms. Meanwhile, competition for engineering talent is fierce. Add to that an extremely high cost of living, and you’ve got a climate that’s not entirely conducive to business investment and growth.

While Silicon Valley may enjoy a formidable concentration of capital and talent, it hardly has a monopoly on ambitious ideas and capable entrepreneurs. Investors willing to bet on opportunities outside the Valley will discover it’s far easier to get in on the ground floor. Margins are considerably higher. There’s far less hype and spin to wade through, making it easier to identify real gems. Plus, local governments can be very helpful with tax breaks and other subsidies for companies committed to high-tech jobs.

And let’s not forget lifestyle: Vancouver, which happens to be one of the world’s most liveable cities, chock full of mountains, ocean, and progressive politics, might make an attractive alternative to the semi-arid Palo Alto, Calif.

—Ryan Holmes is the CEO of HootSuite, a social media management system with more than 7 million users, including 79 of the Fortune 100 companies.

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